The EU’s COVID-19 economic heart attack

The EU economy is in a nosedive — a terrifying and unprecedented annual decline of 7.4 percent — according to a new forecast released by the European Commission on Wednesday.

The downturn, set off by the coronavirus pandemic, will brutalize national balance-sheets this year — sending debt and deficit ratios soaring — and then give way to an uneven recovery in 2021 that will threaten the bloc’s single market and the euro area unless national leaders set aside their differences, Economy Commissioner Paolo Gentiloni warned.

As he unveiled the new numbers — a stunning swing of -8.8 percentage points from a November prediction of 1.4 percent growth in 2020 — Gentiloni said at a news conference that he believed leaders could prevent lasting damage to the EU by agreeing on “common tools” for recovery, even as some countries inevitably rebound better than others.

Gentiloni said leaders recognized that unlike in the 2008 financial crisis, all countries were now in peril, and must work together.

“If I look back to two months ago, one month ago, two weeks ago — this awareness was more limited,” Gentiloni said. “Is this only a human solidarity? Well, I am not dismissing human solidarity. Human solidarity is a very important and European sentiment. But I think it is economic awareness.”

“We are risking some fundamental things — like the level playing field in our single market, the convergence in the euro area, and others,” Gentiloni said, adding that if leaders botch the response, “the consequences will not be for the frugal, or the Southern, or the Eastern, or, the Western. The consequences will be very, very bad for all Europeans.”

“We need common tools,” he continued, “because it is not sufficient to enable member states.”

While Gentiloni did not offer any specifics, his comments represented a pointed message to national capitals as the Commission continues to struggle to develop a revised long-term budget combined with a recovery plan.

Commission President Ursula von der Leyen had hoped to have that plan ready this week, but it has been delayed amid a rancorous debate, including to what extent some hard-hit countries should be forced to borrow to finance the recovery, how much wealthier EU countries should be expected to pay directly, and where middle ground might be found.

In laying out the Commission’s spring economic forecast on Wednesday, Gentiloni emphasized that not only were the new projections historically awful, but they were also remarkably uncertain because the trajectory of the health crisis is still unpredictable.

“The risks to this outlook are exceptionally large and unfortunately they are to the downside,” he said.

Terrible news

Overall, his message was a litany of terrible news: The contraction in 2020 across the EU will be 7.4 percent, far bigger than the 4.5 percent decline in 2009, the worst year of the financial crisis; the recovery in 2021 will be 6.1 percent (“not enough to fully make up for this year’s loss”); inflation will be weaker; unemployment will climb; national debts will soar.

“This will inevitably lead to a marked deterioration in public finances this year in all member states,” he said.

What is normally a dry presentation of the Commission’s twice-a-year financial update suddenly took on apocalyptic tones as Gentiloni, a former Italian prime minister, described how the virus effectively gave the EU an economic heart attack.

“COVID-19 abruptly changed our previous outlook,” Gentiloni said. “EU economic activity  in the EU dropped by around one-third, practically overnight. The disruption resulted in a series of shocks to demand, supply, industrial output, investment, trade and capital flows.”

Gentiloni said the recovery would be long and hard, and for most EU countries would not happen until 2022 at earliest.

“By the end of 2021, according to our forecasts, only Germany, Austria, Croatia, Slovakia and Poland are forecast to recoup the level of economic activity seen in the last quarter of 2019,” he said. “By contrast the level of output in Italy, Spain and the Netherlands is forecast to remain more than 2 percent below the end-of-2019 level.”

By including the Netherlands, among the EU’s wealthier countries, with Italy and Spain, Gentiloni seemed intent on quieting a feud in which Dutch frugality has been portrayed as insensitive to the needs of Southern countries hit hardest by the virus.

In a prepared statement, Gentiloni was even more blunt about the danger that uneven recovery could lead to splits among EU countries. “Such divergence poses a threat to the single market and the euro area,” he said.

On a personal level, Gentiloni noted that the economic shock had put him in an unusual position — no longer the commissioner scolding capitals for spending or borrowing too much.

“It is not usual that the European commissioner for economy invites countries to spend, but this was the case in the last couple of months,” he said.

But he praised national leaders for taking decisive, if costly, action that prevented the crisis from becoming even more dire.

“Consequences of not spending, not intervening — I am not judging the quality of these interventions — would have been worse than the consequences that we will have because of high deficits and high debt ratios,” he said. “Then we will have a period obviously to regain the proper road.”

Message to Italy

Among the steps leaders have taken is allowing countries to access favorable financing through the European Stability Mechanism (ESM), the eurozone’s emergency rescue institution, without any strings attached for health care-related expenses.

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Because the ESM is closely associated with severe austerity conditions, it is politically toxic in Italy, and national politicians have expressed little interest in accessing the special financing. But in response to a reporter’s question, Gentiloni suggested that perhaps Rome should rethink that stance.

“For sure it is an opportunity for member states,” he said. “We discussed this for maybe 16 hours in the Eurogroup and we wouldn’t have done this if we were not convinced that this could be an opportunity.” Still, he added a caveat: “It is sure that countries with higher interest rates could be more interested than others, but this again is for single member states to decide.”

But amid all the uncertainty, Gentiloni stressed there was also a chance for some unexpected positive twists — including that the Commission’s predictions turn out to be overly pessimistic.

“The Commission is continuing to prepare further steps of our common response by acting together with a strong, well-financed and coordinated recovery plan, we can mitigate the impact of the crisis and strengthen our rebound,” Gentiloni said. “And second, given the huge efforts undertaken at the global and EU levels to develop a vaccine, a faster-than-anticipated return to a more normal economic situation would lead for sure to a more benign outcome than the forecasts here.”

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